Getting Internet From the Tap

Recently, I dipped my toes into the net neutrality debate. I shared an article pointing out that a graph, tweeted out by a Representative of California arguing in favor of net neutrality, ironically, makes the argument against net neutrality. This graph highlighted the perspective of the average consumer, i.e.—under net neutrality, internet services actually become more expensive. Sharing this article put me directly in the line of fire by some very passionate netizens (net neutrality advocates).

See the Appendix at the bottom for a brief explanation of the debate.

The Fu***ng Point

Making my way through the name-calling and emotional personal anecdotes attempting to soften the hearts, we finally get to a reasonable argument, or as some say, the fu***ng point.

The internet is not a consumer good. It is a public utility.

Indeed, the increasing access to the internet (most of it prior to the net neutrality rules) has made the internet an expectation—like when you expect homes to have electricity and running water.

The argument is coupled with the assertion that the internet has become a basic human right—right next to freedom of speech, religion, and you can’t be made a slave. I’m a bit hard-pressed to think the internet in those terms, but we can agree it is becoming a necessity. This necessity should be provided in the same way our homes are provided electricity and water. This means setting up internet service providers (ISPs) as local monopolies, with prices set at their average total cost. Further, this government-granted monopoly is offered a “reasonable” rate of return, or profit, to encourage investment and innovation.

No, the Internet Is Not a Public Utility

The problem is that public utilities do not innovate. They are stagnant and noncompetitive. This is why most of the electricity we consume is produced by burning coal. One can make the argument for public utilities for goods that don’t change much. Think of water. Neither the quality of the good nor the way it’s delivered has changed much since say, the 1990s. Aside from a couple bottling schemes, water is still water. Can you tell a difference in the quality of water you had as a kid to the quality you have today? What’s more, even while being delivered as a utility, there is still “higher quality” water sold. You can’t get Perrier from the tap.

The internet, on the other hand, has and continues to undergo dramatic changes in quality and delivery for most Americans. With the rapid innovation and development of broadband infrastructure, it’s hard to think that a public utility model for internet service providers would maximize this essential growth. It’s also hard to imagine how a good, delivered as a public utility, can withstand the explosion in demand for bandwidth.

Sure, it’s not a consumer good. It’s a capital good. But we still buy capital goods.

To harp that the internet is not a consumer good, or fairly, that it won’t be a consumer good in the future misses the mark quite a bit. It is a prediction founded on zero empirical findings. But I think I understand the anger behind treating the internet as a consumer good. In a sense, we are all content producers on the internet. From updating our Facebook statuses to writing nerdy blogs on economics, we are not only consumers of other statuses and blogs, but producers as well. However, how is this different from real life?

Outside of the internet, aren’t we all consumers and subsequently, producers? In order to consume stuff, we also have to produce stuff. It’s called work. To consume the cheeseburger, we produced a couple hours of labor.

In any case, from an economic standpoint, the end of production of any good (whether it be deemed a public utility or not) is consumption. No, the “internet” is not necessarily a consumer good, in the same way a cheeseburger is considered a consumer good. It’s more like a capital good, in the way a lawnmower is to a landscape company. Arguably, people don’t purchase internet services for their homes to consume the internet itself. They purchase internet services to access the plethora of information for entertainment, further consumption, and to become more productive human beings through accessing more knowledge. The real difference between a consumer good and a capital good comes down to how it’s used.

To illustrate: though some people purchase cars just to say they have a car, many people purchase cars because it makes them more productive. It opens access to jobs outside of walking distance. And, cars come in a variety of models, depending on how the consumer wishes to use it. In high school, I wanted a car that got good gas mileage (I was a pizza deliverer), but that I could also use to drive a date to the dinner, movies, or prom. When I started cutting lawns, I bought a truck that could withstand pulling a heavy trailer.

Internet service works in the same way. There are different types of services, at a variety of quality levels, depending on how each person wishes to use it. There are fixed and mobile broadbands offered at different speeds. However, this is a much younger industry undergoing tons of rapid changes every year, unlike other industries.

Further, think of the smaller ISPs, still in their early stages, serving smaller communities with less than 100000 subscribers. They, too, are subject to the “common carrier” rules, increasing the cost of innovating and competing in a market dominated by Verizon, Comcast, and Time Warner. Without the ability to try out different pricing mechanisms, engaging in different business arrangements, you forgo the very forces that keep these larger companies in check.

There Is a Technological Gap

The world isn’t going to crumble if ISPs are not regulated as common carriers. A more plausible scenario is that we continue to see internet quality and access increase for everyone. It won’t keep poor kids from learning how to code. If the poor must decide between a fixed wireless and a mobile wireless, making ISPs public utilities will prolong this decision.

What is accurate is that there is an increasing technological gap between the richer and the poorer. People that come from lower socioeconomic backgrounds are probably more likely to be labeled as consumers of the internet, as opposed to producers. This will not be reversed if the internet is labeled and regulated as a public utility. This is a deeper economic problem that the net neutrality debate will not even come close to solving. A better explanation is that technology has made it easier for societal bubbles to form. Tyler Cowen talks about it in his book, The Complacent Class, and I summarize it here.

Educating people on the best uses of the internet is probably the best thing we can do to close that gap, aside from direct cash transfers to the poor. We’ll survive.

In the end…

Not governing ISPs by means of Title II—like public utilities— but by means of Title I—information services—won’t mean that ISPs are not regulated. They’ve always been regulated. It’s just switching from prohibiting actions before they do “it” to engaging in legal proceedings after they do “it”, whatever “it” may be. It’s going from precautionary regulation to permissionless innovation.

And frankly, permissionless innovation is what has made the internet what it is today and what makes America pretty groovy relative to other countries in the world.

Appendix:

What is Net Neutrality Debate?

Network neutrality is the idea that the internet should be free and open, provided equally to all, whether you’re Google or you’re the ReasonablEconomics blog. The interesting thing is that both those for and against the net-neutrality rules are for this “free and open internet.” Where they differ is on how to enforce it.

The netizens want the internet to be treated as a public utility, or “common carrier” under Title II of the Telecommunications Act of 1996 where the internet service providers (ISPs) like Comcast, Verizon, and AT&T, cannot slow down, speed up, or block traffic of content providers on their internet highways. If these ISPs are treated as public utilities, the way they set prices, what they invest in, and virtually their whole business model must get approved by the government.

Those opposed to legally binding ISPs as public utilities—whom are also too stupid to understand the internet—would rather enforce net neutrality by using the rules already in place at the Federal Communications Commission. The fear is that if treated as public utilities, the Comcasts and Verizons will slow down their building of the internet highways. Further, it would establish ISPs as official monopolies, reducing competition in the internet service provision arena. Importantly, opponents understand that the government doesn’t necessarily know what the correct business model for ISPs is.

A Solution in Search of a Problem

Net neutrality is essentially a solution in search of a problem. We all want ISPs to be neutral and for them to play fair. Funny enough, they have been. The few cases of non-neutral interference of ISPs with content providers have been addressed and handled like any other fuckery we’d see in other industries—by means of the Federal Trade Commission.